How So Many Bad Ideas Manage to Win on Election Day

Every other year, the run-up to election day reminds me of an irony about the “wonders of democracy” rhetoric that peaks then--that is also when the misrepresentations poured into voters’ ears, undermining the likelihood of achieving those wonders, also peak.

The reason is well-captured by a quote from Jonathan Swift, in 1710: “Falsehood flies, and the truth comes limping after it.” At the last minute, lies, damned lies and statistics, not to mention unsupported claims, rumors, innuendo, etc., can have their greatest power, because there is not time for serious thought, research, and effective rebuttal before voters must cast what will therefore be far more misinformed ballots.

What struck me most as an example this year was “Rent control could spur more building,” by Gary Painter, in the Los Angeles Times (10/31). It was written in favor of California’s Proposition 10, which would have re-enabled majority-renter communities to vote themselves large benefits from others’ pockets by imposing new rent control laws (currently banned by state law).

While many studies have shown that rent control reduces construction, Painter offered an alternate theory to convince voters who oppose rent control for that reason. The core of his argument, which he intimated was a standard Econ 101 lesson (despite over 90% of economists expressing disagreement with his conclusion), was:

Price controls can actually spur an increase in supply. When housing developers have too much power in the market, they can maximize profits by raising rents on the apartments they already own. But if rent control limits that option, developers have to go to Plan B if they want to make more money: Build more units.

The core of Painter’s argument was that the consolidation of the homebuilding industry due to the great recession (the number of builders was approximately halved from 2007 to 2012) and further subsequent concentration in the industry, had given builders monopoly power, which they were using to reduce construction. Consequently, he argued that imposing rent control would be able to tame their monopoly power to increase rents, and leave them with building more rental housing as their sole means to higher profits.

There were many holes in this argument, but there was too little time to it to effectively rebut it before the election.

First, Painter ignored the fact that a widely-cited reason for consolidation has been the growth of increased scale economies in the industry, from being able to offer workers more continuous employment in a tight industry labor market to savings from lower negotiated input prices and increased standardization to having specialists to deal with the industry’s regulatory mazes. Those growing advantages, which many industry publications have concluded has “made it nearly impossible for smaller builders to compete,” points not to increasing monopoly power, but to large developers’ widely documented efficiencies, with substantial gains passed on to customers, which smaller, higher cost producers have trouble matching. Further, if big developers were just using increased market power to raise rental housing prices, it would also make smaller developers more profitable, but they are struggling to survive.

Second, the claim that reduced numbers of developers had given them monopoly power to reduce their production to raise rental housing prices is not credible. One article from this July found that, in 2017, “the median market share captured by the top 10 builders in each of the country’s top 25 new-home markets was 63 percent,” and the one cited above said that nationally, “The top ten largest builders account for roughly a quarter of the total new home sales.” That is a far, far cry from monopoly.

Third, even if one thought that increasing concentration in homebuilding did confer monopoly power, there is an even bigger problem with the argument. It is not current homebuilding that determines rents, but the total rental housing stock. And even a substantial reduction in current construction by large developers would have only a small effect on the total rental housing stock, and therefore only a small effect on current rents.

Fourth, Painter’s assertion that rent control would expand rental housing construction by making that the only means to higher developer profits was also faulty. There is a good reason it runs contrary to one of the most agreed-upon results among economists. If rental housing in one location became less profitable to build and maintain, builders could convert to commercial or industrial construction, which are exempt from rent control’s restrictions. They could also move projects to locations with more friendly regulatory regimes. And each option, all of which Painter ignored, reduces rental housing construction in an area that imposes rent control. Further, he also ignored that by making housing construction for smaller builders less profitable, imposing rent control would reduce their construction as well.

Finally, Painter tried to present re-enabling local rent control impositions as just part of multiple reforms to expand rental housing construction, like easing density restrictions and reducing the power of NIMBY groups to stop development, by saying it is a “powerful complement” to them. However, those other policies, in fact, have the opposite effects on rental housing construction from rent control. Instead, it makes rent control the answer to “Which of these things is not like the others?”

Painter’s pro-Proposition 10 propaganda piece failed spectacularly in making its pro-rent control case. It tried to leverage the speed advantage of lies over truth in the last days before an election. Fortunately, however, it did not manage to swing the results. But there are always more elections on the way. We can only hope that lovers of liberty can discover how to make the truth limp faster, in order to get it to more people, than the last-minute misrepresentations we will see then.

Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read.